Interview with Dr. Manish Thapa on Private Equity and Venture Capital in Nepal
Dr. Manish Thapa is the Founding Managing Partner of Global Equity Fund which is the first licensed Private Equity and Venture Capital Fund based in Nepal. He also serves as Board of Directors of Laxmi Bank. He is Visiting Research Professor at Faculty of Political Science and International Studies at University of Warsaw. Beside that, he has served as Professor at United Nations mandated University for Peace in Costa Rica, Shinawatra University in Thailand, McGill University in Canada, University of Notre Dame in USA and Uppsala University in Sweden. He has published numerous books, journal articles, and book chapters with leading publishers and journals. He has been engaged in multiple organizations and associations.
Let’s dig up more about the prospects, challenges, and opportunities of private equity and venture capital in Nepal with Dr. Manish Thapa.
1. According to your LinkedIn Profile, apart from the financial sector, you are actively involved in the academic sector of International Relations, Security Studies, and many more. What factors drove you to take a leap in the Private Equity and Venture Capital field?
It’s a very interesting question. Many people ask me why I switched to the financial sector from Security Studies. Well, there are three major reasons. The first one is my own perspective on life. I always wanted to do new things and in every 1o years time frame, I want to jump into a new career. I started as a journalist and during the course of journalism for almost 10 years, I was working with a lot of INGOs including the United Nations as a consultant.
Then, I wanted to switch my career and go abroad for my further studies. After that, I was more drawn into academia because I really liked to explain the concept, work on the concept and theories and I also found that the life of a Professor is really amazing abroad. So, I decided to do my Ph.D. and then jump into that field. I almost did it for 12, 13 years. I thought that was the saturation point where I wanted to change a career. So this is one reason why I wanted to do and try new things. It’s basically my perception of life.
The second perspective for this is basically my networks. I have a very good network including business people, business houses, and the business community here. So, the financial service sector is one thing that I thought I could do really well and another reason is also my family business background so business was always in my genes from the beginning. I wanted to do something on my own so probably that’s the second reason and the third reason was also kind of an opportunity that basically created.
When I came back to Nepal in 2018, I was a Professor in Costa Rica and many reasons were there to come back. I decided to move back to Nepal and when I came here, the private equity and venture capital ecosystem were developing and were in the founding stage. A couple of private equity funds such as Dolma Impact Fund, Business Oxygen, and True North Associates were creating the ecosystem here. When I was living abroad, I knew about PE-VC, how it worked, and everything. I was basically drawn from the impact part that private equity and venture capital brings into an economy. And when I came here, our regulator, the Securities Board of Nepal (SEBON) took out regulations and called in an application for the PE-VC fund to seek the license.
I found that as an opportunity. That was something that I knew when I was living abroad and I thought this is something new to be created. I always want to contribute and lead the field rather than just going ahead by joining the hands. And same went for Academia. When I started Academia in Nepal, I was one of the founding members of the Department of Conflict, Peace and Development Studies at Tribhuvan University. Creating something new is also a passion for me. So, I thought Private Equity and Venture Capital could be something that I can contribute to. I also teach to the doctoral students at Tribhuvan University and Kathmandu University but the PE-VC sector is something new that I have been pursuing for 2 and a half years.
2. Can you please elaborate more about private equity and venture capital and how this concept helps the organizations in terms of capital and advisory for operation?
Private equity and venture capital are the parts of investment banking. PE-VC is one of the major parts that investment banks do abroad. It’s not a bank, it provides equity, invests into equity. PE-VC are two different forms.
VC aka Venture Capital is basically an investment that is done in the companies of the growing stage with new and innovative ideas. If somebody has an innovative idea and that idea can be translated into a big industry then the investment in that idea is venture capital. So, it’s an initial investment that is done in developing or building-upon enterprises. It can be termed as the early stage of Private Equity whereas Private Equity is bigger than that. Private Equity is much more of investing in growth-stage companies. Let’s take an example of a restaurant which is running great. And the owner of the restaurant wants to grow the business which needs capital. There is a need for capital for growth or leveraging.
To grow the business, generally, there are three ways:
I. Additional capital by investor him/herself by selling his/her own assets
II. Adding more shareholders for more capital
III. Taking loans through banks
Private Equity as an institution pledge equity with the founders to grow that business. To grow the business, either leverage through private equity or bank loans. Hence, these are the definitional aspects of private equity and venture capital.
In the context of Nepal, to do and grow business here, capital is very very costly. Access to capital is one of the costliest affairs to do business here. As banks give loans only with the value of the collateral, not with the capital requirement. Suppose I have collateral with a value of 1 crore, then the bank gives the loan of just 80 lacs. When the person with collateral is already rich. Why does one need a loan? This is the scenario here. Still, banks don’t practice project-based financing, they don’t do financing in ideas. In other developed countries, financing is done in the concept with the projects as collateral which haven’t been introduced in Nepal yet.
Secondly, capital is also very expensive. Banks take the interest with the rates of 8% to maximum 15% and cooperatives taking till 30% interest rate and 36% interest rate in individual lending. Hence, capital is quite expensive and PE-VC funds contribute to this by providing enough capital by cutting down the costs of capital. PE-VCs even invest in ideas. If a certain person has any idea and that idea can really be translatable into an industry, PE-VCs can take that risk. The idea of the founder is his/her capital whereas real capital is given by private equity and venture capital funds.
And that’s how Facebook was created. That’s how Tesla was created and that’s how billionaires are made. Amazon was also made through the PE-VC approach. Somebody promoted the individual capital aka ideas of these people by investing in them and they became what/where they are now. To develop a certain enterprise, to implement innovative ideas, PE-VC funds contribute a lot. Thirdly, PE-VC funds promote entrepreneurial ecosystems by investing in their innovative ideas. So, there is a meaningful contribution of PE-VC in this world.
3. Please elaborate more about the Global Equity Fund and how it implements its activities, the sectors of investment, promoter model, returns, and more.
Global Equity Fund (GEF) is an institutional Private Equity Fund. In Nepal, generally, there are three types of existing private equity funds.
Purely foreign-based funds such as Dolma Impact Fund, Business Oxygen, and One to Watch. These are Nepal focussed funds that are operated from outside. For example, Dolma Impact Fund is operated as FDIs from Mauritius and invests in Nepalese companies. Hence, it’s a kind of foreign-based Nepalese focused fund.
Some private equity funds are like investment companies which are founded with a group of friends and investors and they invest in various enterprises through this investment company. Hence, these PE funds are more of a kind of an investment company model.
The third one is institutional funds. Global Equity Fund is also one of the institutional funds and obviously we are licensed and regulated by SEBON.
Now, many merchant banks are also applying for the licensing of operating Private Equity funds. Some funds are also in the process of launching that are sponsored by the banks and insurance companies.
Regarding the operation of Global Equity Fund, we are a sector-agnostic fund. Wherever there is an opportunity, we invest in it. We diversify our fund into different sectors and we basically invest in anything that makes sense for us so that we can excel in that investment. Now, we are launching our first fund- Laxmi Impact Growth Fund- I which is going to be 25 million US dollars. We are raising our funds and we are focussing on a few areas where we feel Nepal has a huge potential.
For example, we are looking to invest in the Clean Energy, Education Sector, Health Care Sector, and Service sector including E-commerce, Logistics and many more. We are also looking into the Agriculture sector and Hospitality sector. So, these are the six major sectors that we will be focussing on with our first fund. So, we are now raising our funds. At the same time, we are also building pipeline companies to invest in and we have already given commitments to 2-3 companies and some are undergoing a due-diligence process. We are also awaiting our operating license from SEBON. Due to some delays of SEBON, we haven’t invested yet. But we already got our pre-operating license so we are already in operations.
Difference between Mutual Funds and PE funds like GEF: Basically, mutual funds invest in secondary markets. The investment corpus of mutual funds is small. Individuals can start investing in mutual funds from Rs 1000 but for PE Fund investment, an individual must do the minimum commitment of Rs 50 lacs and its multiple as an investment. There should be an investment in the multiple of 50 lacs in private equity funds. Private equity funds do not invest in the secondary market, they invest in the equities of private companies or public companies which are not listed. PE funds invest in early stage or growth- stage privately-owned companies.
Exit Strategies: Basically, there are 3 exit strategies of Private Equity funds. Converting a private company into a public company with the Initial Public Offering (IPO) is one of the exit strategies. The majority of PE funds of Nepal including us are into this strategy as the secondary market is also growing and the movement of the secondary market is very good so, this is one way of exiting our investments in our portfolio companies.
The second Strategy is the Strategic Sale i.e selling the existing company to the strategic buyer. Because of technology, this globe has become a global village. Everything is a market so in the coming 5, 10 years, there may be a regional consolidation. In South Asia, Indian or Chinese companies might like to expand their footprint in Nepal, so instead of starting up fresh, they might buy some of the local companies to expand. For example, Daraz which was originally known as Kaymu was bought by Alibaba to expand their operation in South Asia. That can be one strategy of Strategic Sale. When a certain company reaches the saturation point, there will be no growth and it starts acquiring and consolidating small companies. Merger-acquisition and regional consolidation are the strategies of Strategic Sale.
Another way is the promoters’ buyback strategy. It is the strategy when promoters exit us through buyback of our shares or investment. So, basically, these 3 strategies are used as exit strategies.
Private Equity funds not only invest in companies but also actively participate in the board and provide expertise to foster growth of the companies. We are not like mutual funds targeting passive investors. There are some sectors like hydropower, solar where active involvement may not require. But PE firms have to actively participate, including the aspects of compliance, board meetings, minuting, structuring, and more to run the companies in a corporate structure. So, PE firms become active investors.
Structuring of Partners: The structuring of the Private Equity Fund is a different one. Those who manage the funds are called the General Partners. High-worth individuals, banks, or financial institutions who invest in the fund are called the Limited Partners and they expect returns through investing. There is no vast hierarchy in PE firms like in banks and other institutions. PE firms estimate the hurdle rate and guarantee it to the limited partners or investors as the returns rate. In the other countries, there is a provision of 8% to 10% hurdle rate return.
The hurdle rate return is not provided annually to the investors. When the fund expires, the overall returns of the investment are provided to the investors. There is no provision of distribution of dividends as well. In fact, PE funds are a very risky portfolio investment i.e. high risk, high returns. It’s also proven that PE funds are one of the investment portfolios which generate the highest returns. There are endowment funds collected in the bigger universities abroad and the endowment funds, pension funds, are mostly invested in the private equity funds.
Most of the private equity funds are very successful because the risks are also diversified and the hedging approach is used. If the funds earn more than the hurdle rate, the managing partners or general partners also get promising returns which we call 2 and 20 rule. General partners take 2% management fees for managing the fund and if the returns are more than the hurdle rate, the general partners also gain the returns of 20% as a reward. So, it is a very complex financial instrument and limited partners are just the investors in Private Equity Funds.
PE funds are a very high-risk investment portfolio. The role of sponsors, management team expertise, and experience also matter. The investors also need to invest considering the risk factors, team expertise, and more. Hence, PE funds are more of a trust-based investment rather than a set investment. It is the rule of thumb that PE funds are the most successful investment portfolios which give high returns to investors as they are run by the most competent and experienced professionals .
4. What are some recent developments in the PE-VC industry in terms of Nepal?
PE-VC is a new field and a new financial instrument in Nepal. It was initiated in Nepal after 2015 and funds such as Dolma Impact Fund, Business Oxygen, True North Associates, Team Ventures, and One to Watch provided a foundation. When SEBON formulated the Specialized Investment Fund Regulation in 2019, the ecosystem has kind of transformed.
Previously, Private Equity and Venture Capital were in two different forms only, namely, Foreign-based Nepal-focused funds and private investment companies. With the SIF Regulation 2019, there has been a space for the creation of institutional funds. I can see at least 20 more PE-VC funds will be operating soon due to which there will be easy availability of capital. People with innovative ideas who are in the search of capital can get easy access to capital now. Innovation is a risky investment and these PE-VC funds definitely contribute to the promotion of such innovation.
In my view, the investments will be done on the business that substitutes the imports and which promotes Nepali products so it will enhance the industrialization of the country. Global Equity Fund has an objective to invest in those enterprises which substitute the imports and promote Nepali goods and services whose market can be grown immensely. Most of the PE-VC funds are also working in that direction which supports the industrialization of Nepal. If the imports can be substituted, then it can definitely bring a positive impact on the economy too.
There will be the significant creation of jobs and employment opportunities and the goods and services produced inside Nepal can be promoted outside too. We are also looking into investing in some portfolio companies which have export potential so that their goods and services can be sold outside of Nepal. This will ultimately help to establish the Nepali brands outside too. It’s a matter of pride for us to establish Nepali brands outside the country. Private Equity and venture capital ecosystem will emphasize on fueling these mechanisms so these are going to be the major contributions of the PE-VC ecosystem in Nepal.
5. In your perspective, what changes may occur in the PE-VC industry in the coming 5 years?
There has been a vast change. The banking industry of Nepal is very conservative on its investment approach due to emphasis on collateral based financing. Private Equity and Venture Capital will definitely contribute to changing this landscape. In the earlier days, when someone (who is not from a business family) wanted to do business, they wouldn't get any support even from their family members. But the table has turned over now. The entrepreneurial spirit and ecosystem have been developed now. Nowadays, the majority of youth aim to be entrepreneurs. We can take many examples of successful entrepreneurs who are successful in creating big brands and enterprises.
In the past, most of the youth wanted to get a job at banks but now they want to be entrepreneurs. Not only ideas but capital is also required to translate that dream idea into reality. So Private Equity and Venture Capital like Global Equity Fund can provide that kind of capital and develop the risk-taking capacity too. We will also bring our expertise and networks to enhance that enterprise. If the investments are collected through either international investors or local investors, the capital can be enhanced and in the coming 5,6 years, no youth has to go abroad to work. There will be the availability of plenty of jobs here.
6. As most of the merchant banks are also taking licenses to run PE-VC operations, what kind of competitive scenario may form?
I don’t see any type of competition right now. The PE-VC system is just now in the developing phase. There is no room for competition. First of all, we all need to develop the ecosystem. Until that ecosystem doesn’t reach a certain stage, we are not competitors, we all are contributors. We have to contribute to each other and this industry is in such a nascent stage that there is not even competent human resource who understands Private Equity and Venture Capital landscapes.
We need to work hand in hand by distributing the resources. Many merchant banks and institutional investors are obtaining the license for the operation of private equity and venture capital. And many foreign-based funds are also in preparation to be launched. I think I see the possibility of collaboration rather than competition. We can share the risk in a collaborative approach and with this, we can share our expertise as well which makes all of us winners on both sides.
7. How is GEF different from other PE-VC associations?
Other funds are coming in Nepal that are backed up by the sponsorship of banks or insurance companies. Global Equity Fund is something different. We have different institutional financial institutions as our sponsors. Laxmi Bank, Everest Bank, and Prime Life Insurance are the three main financial institutions that are promoting our fund. At the same time, two corporate houses are also a big part of this fund; Khetan Group (Mr. Rajendra Kumar Khetan) and BLC Conglomerates (Basanta Kumar Chaudhary). In fact Mr. Rajendra Kumar Khetan is the major promoter of the Fund and serves as our advisor. We are blessed by his guidance and his experience as he is one of the visionary investors who have contributed to privatization of the Nepalese financial sector with the founding of Himalayan Bank, Laxmi Bank, Everest Insurance and Prime Life Insurance. And then we have 5 professionals who are also the promoters of this fund. Global Equity Fund is a unique fund with the amalgamation of financial institutions, corporate houses, and a team of expert professionals.
The reason for the structuring of this fund is professionalism. The general partners and the promoters of this fund inspect the day-to-day operation of the fund whereas the financial institutions will back us by sponsoring our funds as well as supporting us with industrial know-how. Also, the corporate houses give us their expertise and access to their network and reach in Nepal as well as abroad. And the investment in the enterprises will be done with full due-diligence and we will be leveraging our networks.
Also, the structuring of General Partners in our Global Equity Fund is very different. The USP of GEF is the experiences of our general partners. I came from an academic background but my acumen is Networking. I can pull all the national and international networks. Our CEO Mr. Somendra P. Pradhan brings operational and functional expertise into the company as he worked at the senior management level (as CFO) at companies like Coca Cola, AkzoNobel, SOS etc in Nepal, Netherlands, Vietnam and Cambodia. Similarly, we have Ms. Swati Roongta who has years of experience in Risk Management and compliance issues and worked for Credit Suisse. Similarly, we have CA Aashish Dhakal who looks after financial engineering and another general partner is Ashutosh Khetan who basically brings the deal structuring expertise with years of working experience in PE/VC industry in England and USA. Everyone is at the same ranking. There is a division of position and in terms of hierarchy, all the general partners are at an equal rank. We have 5 different people with five different experiences all over the world.
Similarly, GEF focuses more on the companies following the protocols of Corporate Social Responsibility and Environmental and Social Governance (ESG). We are also thinking of having a pool of Angel Investors for seed funding. So, we will be working in all 3 verticals: Private Equity, Venture Capital, and Angel Investing (Seed Funding).
So, that’s how our fund is unique and this is the nature and USP of Global Equity Fund.
8. What challenges do PE-VC associations have to face now?
Deals pipeline is one of the major challenges here. The market is very small here. The opportunity of investing in good companies is low. Still, the entrepreneurs are unaware about the entire concept of private equity and venture capital. In Nepal, there are many family-owned or one-man-run businesses and the culture of partnership has not yet developed properly. People feel the burden of filing taxes, timely compliance, auditing while running a business with the partners. And there is no concept of board meetings and minutes.
They feel a kind of intervention when all the aspects are to be fulfilled and others are coming into the decision-making process. So, education about PE-VC is one of the major challenges. Most of the entrepreneurs do not understand that Dilution of share is not the dilution of the value of the company. If an institutional investor is coming into his/her company, it means the increment in the value and the net worth. They don’t understand that if they were making Rs.1 and when institutional investors approach the company, they would be making Rs. 100 and 50% of Rs 100 is more than 100% of Rs 1.
So, the lack of financial literacy amongst the people and the entrepreneurial environment is one of the major challenges here. Also, if there will be tons of Private Equity and Venture Capital, fundraising will be somewhat challenging. To develop the PE-VC ecosystem, there should be a dependence on international investments. In India, PE-VC brings more than 65% FDI whereas 50% in Bangladesh. If this industry wants to be fostered, without international investors, the pace of growth may become slower.
9. How can PE-VC like GEF contribute to the economy of Nepal?
We provide accessible capital to the entrepreneurs and the companies with maximum growth potential which will obviously upgrade the economic growth. Two of the major objectives of the Global Equity Fund (GEF) are investing in the enterprises working to substitute imports and the creation of job opportunities that will ultimately benefit the economy of the nation. These funds will generate more entrepreneurs. GEF has targeted creating employment opportunities for more than 50% of women.
We will be investing one-third of our funds in enterprises led by female founders. And we are very concerned about the companies following ESG Guidelines.
We are not only investing in the companies which basically make products but the companies that are mindful about environmental sustainability. The companies should meet compliance, pay the taxes on time which will ultimately help in the revenue generation of the country too.
10. PE-VC is a new but emerging concept for entrepreneurs and SMEs in terms of Nepal. What is the scope of PE-VC organizations for the graduates?
In PE-VC firms, there are managing partners as staff and when the fund starts operating, there will be the requirements of investment managers. The management graduates either CAs, CFAs, or with MBA or Economics Degrees are highly preferred. But there won’t be massive structurings like banks and other financial institutions.
There is immense scope for management graduates in the coming days. There are another 15, 20 Private Equity funds coming and obviously, the graduates will be able to get more exposure in this field.
11. Any message and recommendation you want to share.
Basically to recent graduates, I want to say that banking is not only an option, there are also new kinds of industries which are coming up. Merchant banking/investment banking is also a big thing now. Equity investing is going to be a new thing that is going to come up and be a big field.
You can start learning PE-VC by researching it, talking with diversified people, the internet, and more. You can watch programs like Shark Tank, Dragon’s Den to understand more. More than 15+ PE-VC funds are coming in Nepal so there are a lot of scopes and working in this field is the most enjoyable job that you do like understanding the industry, networking, and more. There are immense opportunities that you just have to open your mind and try to understand how this industry operates.
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